SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
| For Quarter Ended August 31, 2003 | Commission File Number 0-13394 |
VIDEO DISPLAY CORPORATION
(Exact name of registrant as specified on its charter)
| Georgia (State or other jurisdiction of incorporation or organization) |
58-1217564 (I.R.S.Employer Identification No.) |
1868 Tucker Industrial Drive, Tucker, Georgia 30084
(Address of principal executive offices)
Registrant's telephone number including area code: 770-938-2080
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
| Class |
Outstanding at October 14, 2003 |
|
|---|---|---|
| Common Stock, No Par Value | 4,498,000 |
Video Display Corporation and Subsidiaries
Index
| |
|
|
Page |
|
|---|---|---|---|---|
| PART I. FINANCIAL INFORMATION | ||||
Item 1. |
Financial Statements |
|||
Consolidated balance sheets— August 31, 2003 (unaudited) and February 28, 2003 (audited) |
3 |
|||
Consolidated statements of income— Three and six months ended August 31, 2003 and 2002 (unaudited) |
4 |
|||
Consolidated statements of shareholders' equity and comprehensive income— Twelve months ended February 28, 2003 (audited) and the six months ended August 31, 2003 (unaudited) |
5 |
|||
Consolidated statements of cash flows— Six months ended August 31, 2003 and 2002 (unaudited) |
6 |
|||
Notes to consolidated financial statements— August 31, 2003 (unaudited) |
7-12 |
|||
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
13-17 |
||
Item 3. |
Quantitative and Qualitative Disclosure About Market Risk |
18 |
||
Item 4. |
Controls and Procedures |
18 |
||
PART II. OTHER INFORMATION |
||||
Item 1. |
Legal Proceedings |
19 |
||
Item 2. |
Changes in Securities and Use of Proceeds |
19 |
||
Item 3. |
Defaults upon Senior Securities |
19 |
||
Item 4. |
Submission of Matters to a Vote of Security Holders |
19 |
||
Item 5. |
Other Information |
19 |
||
Item 6. |
Exhibits and Reports on Form 8-K |
19 |
||
SIGNATURES |
20 |
|||
EXHIBIT 31—CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 |
21-22 |
|||
EXHIBIT 32—CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |
23 |
|||
2
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
| |
August 31, 2003 |
February 28, 2003 |
||||||
|---|---|---|---|---|---|---|---|---|
| |
(unaudited) |
(Note A) |
||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 1,189,000 | $ | 2,392,000 | ||||
| Accounts receivable, less allowance for possible losses of $293,000 and $502,000 | 9,895,000 | 11,120,000 | ||||||
| Inventories (Notes C and F) | 28,205,000 | 28,821,000 | ||||||
| Prepaid expenses and other | 3,746,000 | 4,289,000 | ||||||
| Total current assets | 43,035,000 | 46,622,000 | ||||||
| Property, plant and equipment: | ||||||||
| Land | 540,000 | 540,000 | ||||||
| Buildings | 7,011,000 | 6,858,000 | ||||||
| Machinery and equipment | 18,172,000 | 17,949,000 | ||||||
| 25,723,000 | 25,347,000 | |||||||
| Accumulated depreciation and amortization | (17,799,000 | ) | (17,186,000 | ) | ||||
| Net property, plant, and equipment | 7,924,000 | 8,161,000 | ||||||
| Other assets | 2,453,000 | 2,552,000 | ||||||
| Total assets | $ | 53,412,000 | $ | 57,335,000 | ||||
Liabilities and Shareholders' Equity |
||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 3,417,000 | $ | 3,809,000 | ||||
| Accrued liabilities | 4,359,000 | 4,077,000 | ||||||
| Line of credit (Note E) | 5,457,000 | 9,229,000 | ||||||
| Notes payable to shareholders | 37,000 | 60,000 | ||||||
| Current maturities of long-term debt (Note D) | 2,697,000 | 2,708,000 | ||||||
| Total current liabilities | 15,967,000 | 19,883,000 | ||||||
Convertible subordinated debentures |
1,000,000 |
1,000,000 |
||||||
| Long-term debt, less current maturities (Note D) | 4,084,000 | 5,155,000 | ||||||
| Notes payable to shareholders, less current maturities | 8,502,000 | 8,311,000 | ||||||
| Deferred income taxes | 554,000 | 554,000 | ||||||
| Other | 124,000 | 176,000 | ||||||
| Total liabilities | 30,231,000 | 35,079,000 | ||||||
| Redeemable common stock; 15,000 shares issued and outstanding at February 28, 2003 (Note F) | — | 100,000 | ||||||
Commitments |
— |
— |
||||||
Shareholders' Equity (Note G) |
||||||||
| Preferred stock, no par value—2,000,000 shares authorized; none issued and outstanding | — | — | ||||||
| Common stock, no par value—10,000,000 shares authorized; 4,586,000 and 4,700,000 issued and outstanding | 5,213,000 | 5,293,000 | ||||||
| Additional paid in capital | 92,000 | 92,000 | ||||||
| Retained earnings | 18,118,000 | 17,004,000 | ||||||
| Accumulated other comprehensive loss | (242,000 | ) | (233,000 | ) | ||||
| Total shareholders' equity | 23,181,000 | 22,156,000 | ||||||
| Total liabilities and shareholders' equity | $ | 53,412,000 | $ | 57,335,000 | ||||
The accompanying notes are an integral part of these statements.
3
Video Display Corporation and Subsidiaries
Consolidated Statements of Income (unaudited)
| |
Three Months Ended August 31, |
Six Months Ended August 31, |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2003 |
2002 |
2003 |
2002 |
||||||||||
| Net sales | $ | 19,115,000 | $ | 19,607,000 | $ | 38,128,000 | $ | 38,426,000 | ||||||
| Cost of goods sold | 12,485,000 | 13,930,000 | 25,267,000 | 26,643,000 | ||||||||||
| Gross profit | 6,630,000 | 5,677,000 | 12,861,000 | 11,783,000 | ||||||||||
| Operating expenses | ||||||||||||||
| Selling and delivery | 1,685,000 | 1,914,000 | 3,464,000 | 3,941,000 | ||||||||||
| General and administrative | 3,081,000 | 2,747,000 | 5,998,000 | 6,104,000 | ||||||||||
| 4,766,000 | 4,661,000 | 9,462,000 | 10,045,000 | |||||||||||
| Operating profit | 1,864,000 | 1,016,000 | 3,399,000 | 1,738,000 | ||||||||||
| Other income (expense) | ||||||||||||||
| Interest expense | (322,000 | ) | (455,000 | ) | (641,000 | ) | (706,000 | ) | ||||||
| Other, net | 74,000 | (22,000 | ) | 118,000 | 80,000 | |||||||||
| (248,000 | ) | (477,000 | ) | (523,000 | ) | (626,000 | ) | |||||||
| Income before income taxes | 1,616,000 | 539,000 | 2,876,000 | 1,112,000 | ||||||||||
| Income tax expense | 614,000 | 182,000 | 1,093,000 | 416,000 | ||||||||||
| Net income | $ | 1,002,000 | $ | 357,000 | $ | 1,783,000 | $ | 696,000 | ||||||
| Basic earnings per share of common stock (Note G) | $ | 0.22 | $ | 0.07 | $ | 0.39 | $ | 0.15 | ||||||
| Diluted earnings per share of common stock (Note G) | $ | 0.21 | $ | 0.07 | $ | 0.37 | $ | 0.14 | ||||||
| Basic weighted average shares outstanding | 4,579,000 | 4,764,000 | 4,609,000 | 4,760,000 | ||||||||||
| Diluted weighted average shares outstanding | 4,922,000 | 5,105,000 | 4,946,000 | 5,105,000 | ||||||||||
The accompanying notes are an integral part of these statements.
4
Video Display Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Twelve Months Ended February 28, 2003 (audited) and
the Six Months Ended August 31, 2003 (unaudited)
| |
Common Stock |
Additional Paid In Capital |
Accumulated Other Comprehensive Income |
Retained Earnings |
Current Period Comprehensive Income |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at February 28, 2002 | $ | 5,325,000 | $ | 92,000 | $ | (1,393,000 | ) | $ | 20,635,000 | |||||||||
| Net loss for the year | — | — | — | (3,286,000 | ) | $ | (3,286,000 | ) | ||||||||||
| Unrealized loss on marketable equity securities | — | — | (4,000 | ) | — | (4,000 | ) | |||||||||||
| Foreign currency translation adjustment | — | — | (132,000 | ) | — | (132,000 | ) | |||||||||||
| Foreign currency translation adjustment recognized in operations resulting from liquidation of foreign subsidiary | — | — | 1,296,000 | — | 1,296,000 | |||||||||||||
| Total comprehensive loss | $ | (2,126,000 | ) | |||||||||||||||
| Issuance of common stock under stock option plan | 37,000 | — | — | — | ||||||||||||||
| Repurchase of common stock | (69,000 | ) | — | — | (345,000 | ) | ||||||||||||
| Balance at February 28, 2003 | 5,293,000 | 92,000 | (233,000 | ) | 17,004,000 | |||||||||||||
| Net income for the period | — | — | — | 1,783,000 | $ | 1,783,000 | ||||||||||||
| Unrealized gains on marketable equity securities | — | — | 13,000 | — | 13,000 | |||||||||||||
| Foreign currency translation adjustment | — | — | (22,000 | ) | — | (22,000 | ) | |||||||||||
| Total comprehensive income | $ | 1,774,000 | ||||||||||||||||
| Issuance of common stock under stock option plan | 13,000 | — | — | — | ||||||||||||||
| Reissuance of common stock | 51,000 | — | — | — | ||||||||||||||
| Repurchase of common stock | (144,000 | ) | — | — | (669,000 | ) | ||||||||||||
| Balance at August 31, 2003 | $ | 5,213,000 | $ | 92,000 | $ | (242,000 | ) | $ | 18,118,000 | |||||||||
The accompanying notes are an integral part of these statements.
5
Video Display Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
| |
Six Months Ended August 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2003 |
2002 |
|||||
| Operating Activities | |||||||
| Net income | $ | 1,783,000 | $ | 696,000 | |||
| Adjustments to reconcile net income to net cash provided by operations: | |||||||
| Depreciation and amortization | 612,000 | 716,000 | |||||
| Provision for bad debts | 87,000 | 182,000 | |||||
| Changes in working capital: | |||||||
| Accounts receivable | 1,139,000 | 26,000 | |||||
| Inventories | 616,000 | (821,000 | ) | ||||
| Prepaid expenses | 543,000 | 49,000 | |||||
| Accounts payable and accrued liabilities | (110,000 | ) | 761,000 | ||||
| Net cash provided by operating activities | 4,670,000 | 1,609,000 | |||||
| Investing activities | |||||||
| Capital expenditures | (375,000 | ) | (600,000 | ) | |||
| Other investing activities | 47,000 | 88,000 | |||||
| Net cash used in provided by investing activities | (328,000 | ) | (512,000 | ) | |||
| Financing activities | |||||||
| Proceeds from long-term debt and line of credit | 9,497,000 | 7,776,000 | |||||
| Payments on long-term debt and lines of credit | (14,181,000 | ) | (8,234,000 | ) | |||
| Proceeds from exercise of stock options | 13,000 | 11,000 | |||||
| Purchase of common stock under repurchase program | (813,000 | ) | (46,000 | ) | |||
| Redemption of redeemable common stock | (100,000 | ) | — | ||||
| Proceeds from reissuance of common stock | 51,000 | — | |||||
| Net cash used in financing activities | (5,533,000 | ) | (493,000 | ) | |||
| Effect of exchange rates on cash | (12,000 | ) | 57,000 | ||||
| Net change in cash | (1,203,000 | ) | 661,000 | ||||
| Cash, beginning of period | 2,392,000 | 1,615,000 | |||||
| Cash, end of period | $ | 1,189,000 | $ | 2,276,000 | |||
The accompanying notes are an integral part of these statements.
6
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with instructions for Form 10-Q as found in Article 10 of Regulation S-X. Accordingly, such consolidated financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the periods covered have been reflected in the statements. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended February 28, 2003 included in the Company's Annual Report on Form 10-K.
The consolidated financial statements included the accounts of the Company and its majority owned subsidiaries after elimination of all significant intercompany accounts and transactions. Certain prior period balances have been reclassified to conform to the current period presentation.
Assets and liabilities of foreign subsidiaries are translated using the exchange rate in effect at the end of the period. Revenues and expenses are translated using the average of the exchange rates in effect during the period. Translation adjustments and transaction gains and losses related to long-term intercompany transactions are accumulated as a separate component of shareholders' equity. The Company has a subsidiary in the U.K., which is not material, and uses the British pound as its functional currency.
The Company reported its Mexican subsidiary on the basis of the functional currency being the U.S. dollar, effective January 1, 1997, as over 90% of the subsidiary's sales and purchases were with the parent with accounts receivable and accounts payable settled in U.S. dollars. The Mexican operations were substantially shut down in the third quarter of fiscal 2003 and the cumulative translation losses were recognized as a charge against income in that fiscal year.
NOTE B—ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal 2003 and such adoption did not have a material impact on the Company's consolidated financial statements. The recognition provisions of FIN 45 are not expected to have a material adverse impact on the Company's consolidated results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling
7
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to other entities in the first fiscal year or interim period beginning after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Since the Company currently has identified no variable interest entities, management expects that the adoption of the provisions of FIN 46 will not have a material impact on the Company's consolidated results of operations or financial position.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 requires three types of freestanding financial instruments to be classified as liabilities in statements of financial position. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type, which includes put options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments are obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominately to a variable such as a market index, or varies inversely with the value of the issuer's shares. The majority of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In accordance with SFAS No. 150, the Company adopted this standard on September 1, 2003, which did not have a material impact on the Company's consolidated financial position and results of operations. During fiscal 2003, the Company issued $100,000 of redeemable common stock in exchange for inventory. During the first quarter ended May 31, 2003, the stock was redeemed at the option of the holder for $100,000 cash.
There were no other recently issued accounting pronouncements with delayed effective dates that would currently have a material impact on the Company's consolidated financial position and results of operations.
NOTE C—INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market.
Inventories consisted of the following:
| |
August 31, 2003 |
February 28, 2003 |
|||||
|---|---|---|---|---|---|---|---|
| Raw materials and work-in-process | $ | 16,777,000 | $ | 14,947,000 | |||
| Finished goods | 14,472,000 | 16,213,000 | |||||
| 31,249,000 | 31,160,000 | ||||||
| Reserves for obsolescence | (3,044,000 | ) | (2,339,000 | ) | |||
| $ | 28,205,000 | $ | 28,821,000 | ||||
8
NOTE D—LONG-TERM DEBT
Long-term debt consisted of the following:
| |
August 31, 2003 |
February 28, 2003 |
|||||
|---|---|---|---|---|---|---|---|
| Term loan facility, floating interest rate based on an adjusted LIBOR rate (4.00% as of August 31, 2003), quarterly principal payments commenced November 1999 and maturing November 2005; collateralized by assets of Aydin Display, Inc. | $ | 2,500,000 | $ | 3,125,000 | |||
Term loan facility, interest rate of prime (4.00% as of August 31, 2003) plus 1.75%; monthly principal payments of $57,000 payable through July 2004 with a final balance due July 31, 2004 of $1,441,000; collateralized by inventories and receivables of Fox International, Inc. |
2,066,000 |
2,410,000 |
|||||
Note payable to bank; interest rate of prime plus 1.5%; monthly principal payments of $9,000 payable through May 2010; collateralized by assets of XKD Corporation. |
559,000 |
593,000 |
|||||
Mortgage payable to bank; interest not to exceed 7.5% and maturing December 2003; collateralized by land and building of Fox International, Inc. |
567,000 |
589,000 |
|||||
Mortgage payable to bank; interest rate of prime plus 0.5%; monthly principal and interest payments of $5,000 payable through October 2021; collateralized by land and building of Teltron Technologies, Inc. |
581,000 |
588,000 |
|||||
Other |
508,000 |
558,000 |
|||||
| 6,781,000 | 7,863,000 | ||||||
| Less current portion | (2,697,000 | ) | (2,708,000 | ) | |||
| $ | 4,084,000 | $ | 5,155,000 | ||||
NOTE E—LINE OF CREDIT
At August 31, 2003, the Company has a $9,500,000 credit facility with a bank. The interest rate on the line of credit is a floating LIBOR rate (3.6% at August 31, 2003) based on a ratio of debt to EBITDA, as defined. The weighted average interest rate during the six months ended August 31, 2003 and the year ended February 28, 2003 was 3.75% and 3.4%. The average amount and maximum amount outstanding were $7,791,000 and $8,801,000, respectively, during the six months ended August 31, 2003, and $9,248,000 and $9,524,000, respectively, during fiscal year 2003. Borrowings under the line of credit are limited by eligible accounts receivable, inventory and real estate, as defined, and includes a commitment fee of 0.25% for the unused portion. As of August 31, 2003, the outstanding balance on the line of credit was $5,457,000 and the available amount for borrowing was $4,043,000.
The line of credit agreement contains affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage. Additionally, dividend payments, capital expenditures and acquisitions have certain restrictions. Substantially all of the Company's retained earnings are restricted based upon these covenants. As of February 28, 2003, the Company was not in compliance with the minimum debt service ratio, the senior funded debt to EBITDA ratio (due to the third quarter adjustment and write-off of inventories, equipment and other assets as a result of the internal reorganization and closure of three facilities) and additional indebtedness. Subsequent to February 28, 2003, the bank waived those covenant violations. As of August 31, 2003 subject to the waivers, the Company is in compliance with its loan covenants.
9
The line of credit expired on July 1, 2003 but was extended until December 1, 2003. The outstanding amount under this line is classified as a current liability in the accompanying consolidated balance sheets. On September 26, 2003, the Company was informed by its lender that the lenders loan committee had approved the expansion of the credit facility from $9,500,000 to $12,000,000. In addition to the $12,000,000 line of credit, the Company's lender has agreed to advance $3,500,000 of short term (180 day) financing to allow the Company to consider methods of acquisition of real estate currently under lease by the Company. The interest rate to be applied on the new line of credit will be a variable rate based upon a ratio of Senior Funded Debt to EBITDA (Earnings before interest, taxes, depreciation, and amortization). The initial rate is anticipated to be LIBOR plus 2.0%, but can increase or decrease in a range of 1.75% to 2.50% spread over LIBOR. The new agreement is to be for two years. Borrowings will be based on eligible accounts receivable and inventory and appraised values of certain equipment and Company owned real property. It is expected that the new line will be in place by November 15, 2003, pending completion of certain appraisals. The Company is not anticipating any problems closing on the loan.
NOTE F—SUPPLEMENTAL CASH FLOW INFORMATION
| |
Six Months Ended |
|||||
|---|---|---|---|---|---|---|
| |
August 31, 2003 |
August 31, 2002 |
||||
| Cash Paid for: | ||||||
| Interest | $ | 641,000 | $ | 599,000 | ||
| Income taxes, net of refunds | $ | 382,000 | $ | 377,000 | ||
| Non-cash Transactions: | ||||||
| Issuance of redeemable common stock for purchase of inventory | $ | |||||